No, I’m not offering up a delayed report on the Olympics. But I am following up on earlier post on why Canada avoided a banking crisis.
In today’s (March 19) Wall Street Journal, AEIs Alex Pollock provides an important piece of the puzzle. Canada avoided a housing crisis, the progenitor of the U.S. banking crisis. It did so by having sounder banking and housing policies. Above all, it had no Fannie Mae & Freddie Mac.
Canada isn’t a free-market paradise. But it beats the U.S. in banking and housing policies. I commend Alex’s article to you.
March 19, 2010 at 8:42 am
While it may manifest itself in a number of ways, many of these pieces comparing Canada and the US can be summarized as follows: there is significantly less moral hazard in the banking and mortgage system in Canada.
Few commentators express it in those terms, I think, because the implied remedy is to reduce moral hazard in the US system. And, of course, we can’t have that. Also, they prefer the alternate narrative that there is “better regulation” in Canada.
March 19, 2010 at 9:45 am
“Above all, it had no Fannie Mae & Freddie Mac.”
It’s starting to get a bit annoying how many people get this wrong. Canada does indeed have its own Freddie/Fannie.
The Canadian Housing Trust (CHT), managed by the CMHC (mentioned in the article), has been buying government-guaranteed MBS since being founded in 2001. The Insured Mortgage Purchase Program (IMPP) run by the Finance Dept has been buying MBS since being founded in 2008.
Together, the CHT and IMPP are the largest holders of mortgage debt in the country. They hold more than the Royal Bank and TD Bank combined. How the author can ignore these two massive government buyers is beyond me; he seems quite intent on sacrificing facts for the sake of scoring ideological points.
The only difference between Canada and US is that the Canadian government got into the mortgage buying game later than the US (2001 vs 1980s), and hasn’t yet had to pay the consequences.
March 19, 2010 at 10:29 am
Canada has always had a better banking system and didn’t have a central bank until 1935, etc. Do you think this might have anything to do with the fact that a lot of the early settlers to Canada were Scottish, and that they brought more of a free banking-oriented tradition with them?
March 19, 2010 at 10:46 am
http://online.wsj.com/article/SB124165325829393691.html
Also, (now) lower deposit insurance (I think)
and no track record of too big to fail (at least in the banking world), although government purchase of MBS is certainly a form of support (as is Fed/Bank of Canada credit easing, I suppose).
March 19, 2010 at 11:22 am
‘Also, they prefer the alternate narrative that there is “better regulation” in Canada.’
Isn’t less moral hazard an example of better regulation?!
March 19, 2010 at 1:26 pm
The WSJ piece is excellent. The point that Canadian mortgage lenders have full recourse to the borrower’s other assets — so owners can’t borrow wildly and then just walk away from the property when they can’t pay — is surely an important factor explaining why Canada did not have a real estate bubble. This is a key difference from US law.
March 19, 2010 at 2:19 pm
Laws on mortgage recourse vary by state. In CA and NV, the lender has one recourse: either forecclose, or sue for payment. But not both.
In TX and other states, lenders may pursue both courses and file liens, etc. One would think someone has done a paper on the differences among states.
March 19, 2010 at 4:29 pm
My impression from living in NY is that it’s no recourse. It would be interesting to see how differences in states laws affect the markets.
March 19, 2010 at 5:07 pm
Some time ago I read a paper on the varying mortgage recourse rules among US states. Recourse does seem to have an empirical influence:
“Recourse and Residential Mortgage Default: Theory and Evidence from U.S. States”
available here;
http://www.richmondfed.org/publications/research/working_papers/2009/wp_09-10.cfm
March 19, 2010 at 11:19 pm
The latter posts are onto something. Years ago (about 30 in fact) the Fed did a study on mortgage recording and recourse practices among the states. The states where the bankers wrote the rules allow foreclosure plus recourse to the debtor. The states where debtors wrote the rules allow recourse or foreclosure but not both. Or foreclosure only. The Eastern states tend to be pro-banker; once you cross the Appalachians and the Ohio, the rules become more debtor-friendly.
No matter, however. There is an underlying ethics of the thing. If you are a believer, then read the later Jewish prophets. What do you think that they are writing about?
If you are not a believer, get Aristotle’s The Athenian Constitution and read the story of Solon of Athens.
Whether you like it or not, debt reduction, cancellation, and forgiveness are part and parcel of every successful social regeneration in history. “Pay or become my slave” is a different ethical (and historical) consideration altogether. But here’s the rule (see Aristotle’s Nichomachaean Ethics, book on “Justice”): Such forgiveness has to be an extraordinary remedy (in domestic affairs), once every two generations or so at most. The ancient Hebrews restored the Ancient Homesteads once every 50 years.
It’s time. That raving radical leftist economist (I jest), Larry Lindsay, suggested in the fall of 2008 that the feds should just give it up and agree to refinance everyone at 4.5 percent. Absolutely the correct and a Solon-like remedy. Analogous to the Home Owners Loan Corporation of the 1930s (other raving lunatics like Alex Pollock of AEI, Lowell Harriss of Columbia [he wrote the book on the HOLC], and of course myself also advocate HOLC-like remedies for the current mess).
When the banks were bailed out with TARP funds, the feds only reluctantly took warrants and received, as I recall, only one warrant for every $7 advanced. When Jesse Jones in the 1930s and Roger Altman in the late 1970s (Chrysler) did it, the warrants were dollar for dollar. What is the TARP approach but a generous debt reduction for the banks? Yet the banks could not and would not extend the same mercy to their borrowers.
In any case, both believers and nonbelievers would profit from reading and thinking about Luke 16:1-8, where a steward commits an action analogous to Solon’s. There, Jesus appears to commend that action.
See also, Matthew 18:23-35, where the king forgives his steward’s large debt but afterward the steward will not forgive a smaller debt that a man owes to him. The steward is denounced as wicked. What, then, if any, was the situation of our banks over the last two years?
I learned these stories in my youth, and Ed Kane recently reminded me of them.
On the other side of the line of righteousness, what do you think John Maynard Keynes’s The Economic Consequences of the Peace was about? Giving us more efficient tax farmers, perhaps? Or something else entirely, more along the lines of the stories I have just recounted?
It ill behooves a set of bankers who just received the greatest forgiveness in the history of man to turn around and exact strict conditions from their debtors. And bankers who don’t want to be put into the position of seeming to have to forgive should not put their debtors into floating rate mortgage loans during a bubble in the first place.
It’s an odd set of reasoning to say, “Because the government encouraged stupid lending, I had no other choice.” When caught, the banker may ask for forgiveness, I suppose. But if forgiven, he certainly needs to look to forgiveness of his own debtors. And you can quote me on that.–Walker Todd
March 20, 2010 at 12:09 am
Walker always raises the relevant issues.
There is a move to return in effect to debtor prisons by removing categories of debt from bankruptcy. Left and right have each contributed to this. It is just special-interest legislation.
If bankruptcy is to be serious, all debt should be subject to the proceedings. Including tax debts.
If we want to return to debtors prisons, it is a viable system. Wives and children can be sold into slavery until the debts are paid off. It works. (For the humorless, that is irony.)
I do think, however, that systems that are generally creditor friendly can protect debtors through lower interest rates. The worst policy is to create regime uncertainty about debt contracts. That is what has happened recently.